Abbott Laboratories (Pakistan) Limited

Abbott Laboratories (Pakistan) Limited (PSX: ABOT) was incorporated in 1948 as a private marketing company and had its first manufacturing facility commissioned in 1962 in Karachi. ABOT has gained significant market share in pharmaceuticals, nutrition, diagnostics, and diabetes care to become the second-largest pharmaceutical company in Pakistan. Abbott is involved in the manufacturing of a diversified range of more than 200 pharmaceutical and general healthcare products to meet the demands of local as well as international market.
Globally the company was founded more than 125 years ago by Dr. Wallace C. Abbott out of Chicago, USA. The global health giant has presence in over 150 countries and employs more than 74,000 people. Abbott's range of product includes generic pharmaceuticals, medical devices, laboratory diagnostics and nutrition. The pharmaceutical segment contributes about 75 percent to the company's revenue and includes products such as Brufen, Entamizole, Klaricid and Duphaston.
ABOT enjoys a 30 percent market share in the nutrition segment, which is company's star performer in terms of profitability as well. It includes products like Ensure and Pediasure. The company has two plants in Karachi located at Korangi and Landhi. Abbott Pakistan employs more than 2400 people across the country.
Past performance Abbott Pakistan's top line almost doubled while earnings per share have gone from Rs 16.8 in 2011 to Rs 41 rupees in 2016. The mushrooming growth in top line was also accompanied by rising profitability margins with gross margins increasing by 4 percent mainly due to lower cost of raw material and a better product mix over a five-year period. The company's nutrition segment had a key role to play in increasing profitability and lending support to the bottom line.
During FY17, ABOT managed to increase its top line by 12 percent while gross profit clocked in at 39 percent on a year-on-year basis. Segment-wise, pharmaceutical sales clocked in the highest growth at 13 percent while nutritional sales increased by 10 percent and diagnostic and diabetes care by 2 percent as compared to FY16.
Abbott has relied on product diversification and has launched numerous products on a yearly basis, which has resulted in overall growth of the company. In addition to product launches, the company has increased its branding activities and expenditure on advertisement, which has helped it increase its market penetration.
Snapshot 1HFY18 The overall sales mix of the company mostly consists of domestic sales, which saw a decent increase of 15 percent in 1HFY18 as compared to the same period last year. Export sales increased by 9 percent and hold a minor share in Abbott Pakistan's overall sales mix. There was a good up tick in the company's nutritional segment which saw revenues increase by 12 percent due to the rise in demand for child nutrition supplements.
However, even as the top line witnessed an increase, the company's profitability margins tell a different story. ABOT's most recent quarterly report has attributed the fall in margins to the devaluation of the rupee, which has been accompanied by a subsequent increase in raw material prices. The largest decrease in margin came in the others segment that saw profitability decline by almost 25 percent, while the least affected was the nutritional segment.
The company's marketing and distribution expenses also saw an increase of almost 30 percent as compared to the same period in the previous year on account of increased marketing efforts on Abbott's leadership brands. Other charges which rose by 20 percent and this increase is mainly pertained to exchange rate losses. The company's bottom line decreased by almost 25 percent as a result of falling margins and increased expenditure.
Share price performance vs. KSE-100 During the past year, Abbott has mostly underperformed the benchmark KSE-100 index. Although the stock closely trailed the KSE-100 till Aug-17, the stock has widened the gap, underperforming by a wider margin since the Jan-18. General volatility in the stock market over the past year has led to limited investor interest in the script. The rupee depreciation has also been particularly troublesome for the company which has seen its margins dip.
Pattern of shareholding Abbott Pakistan has the majority of its shareholding outside Pakistan. The parent company holds about 78 percent of the total outstanding shares. Mutual funds and general public as compared to last year have increased their holding in the company and now have 5.7 percent and 10.1 percent shares respectively.
Future outlook The new drug pricing policy has addressed a lot of pertinent issues pertaining to the pharmaceutical sector. However, a key concern for pharmaceutical companies is that rupee depreciation is not dealt with in the policy, which allows for an annual inflationary adjustment in price based on the consumer price index (CPI). This means that companies like Abbott are unable to raise prices to account for the rapid depreciation that has taken place in the past year, and has led to eroding profitability margins for the company.
In its recent quarterly report, the firm highlighted that it is facing rapid cost escalations on account of inflation coupled with a depreciating rupee. This has led the company to instead focus on reducing manufacturing and operating costs by improving productivity and cost rationalisation efforts. However, a further depreciation in the rupee will likely have more adverse impact on the firm's bottom line. Note: Abbott Laboratories Pakistan Limited's financial year-end is 31st December.

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Abbott Laboratories (Pakistan) Limited

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Rs (mn)                  1HFY18   1HFY17     YoY change

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Sales

Domestic                  13039    11377            15%

Export                      739      680             9%

COGS                       8959     7511            19%

Gross profit               4818     4547             6%

Selling and distribution   2388     1844            30%

Admin expenses              254      209            22%

Other charges               330      276            20%

Other income                237      231             3%

PAT                        1253     1678           -25%

EPS                        12.8    17.14           -25%

Gross margin                37%      40%   down 302 bps

Net margin                  10%      15%   down 514 bps

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Source: Company accounts

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Pattern of Shareholding (As of Dec 31, 2017)

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Directors, CEO, and their Spouces and minor children         41,641    0.04%

Associated Companies, Undertakings and related parties   77,189,066   78.84%

M/S. Abbott Asia Investments Limited                     76,259,451

Trustees Abbott Pakistan Staff Provident Fund               490,926

Trustees Abbott Pakistan Staff PensionFund                  438,689

Mutual Funds                                              5,585,001    5.60%

Executives                                                    6,280    0.01%

Public Sector Companies & Corporations                      830,624    0.85%

Banks, DFI, NBFC, Insurance Co, Takaful, Modaraba         1,902,736    3.60%

& Pension Funds

Individuals                                               9,891,482    9.36%

Others                                                    2,453,472    1.71%

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